Importance of Cybersecurity Due Diligence in M&A Transactions

Mergers and acquisitions (M&A) are transactions that can bring significant benefits to businesses by allowing them to deploy capital wisely and gain a competitive edge in the market. However, along with the advantages, M&A activities can also expose companies to cyber risks that could potentially lead to the theft of valuable intellectual property, exposure of confidential transaction data, financial loss, harm to brand reputation, and legal consequences. Chandra Prakash Suryawanshi, the Managing Director and India Global Cyber Risk Services Practice Leader at Alvarez & Marsal (A&M), emphasizes the pivotal role cybersecurity due diligence plays in ensuring the success of M&A deals and maintaining the security of firms in a rapidly evolving technological landscape.

According to Suryawanshi, cybersecurity diligence is essential across various sectors, with a particular emphasis in financial, healthcare, technology, and platform-enabled industries. As cyber threats continue to evolve and expand due to the broader attack surface of digital businesses, companies in manufacturing, energy, utilities, and automotive sectors are also increasingly vulnerable due to digital adoption and technological advancements. By conducting thorough cybersecurity diligence, organizations can make informed decisions, accurately assess the value of digital assets, and implement effective risk mitigation strategies post-acquisition while anticipating potential expenses that may arise.

In the aftermath of a phishing attack, evaluating cybersecurity risks becomes crucial. This evaluation involves analyzing the nature and impact of the attack (such as generic phishing or spear-phishing with sophisticated malware), identifying vulnerabilities in security controls, and assessing the organization’s ability to detect and respond to cyber incidents. Various assessments, including configuration reviews, penetration testing, and incident response simulations, are conducted to assess resilience and identify weaknesses within the security framework.

When negotiating a purchase price while considering cybersecurity vulnerabilities, several key aspects require attention. These include evaluating intellectual property rights, ensuring compliance with licensing regulations and protection from cyber threats, as well as assessing regulatory compliance, cybersecurity risk exposure, remediation costs, and contractual liabilities related to past incidents. Addressing these factors enables buyers to accurately gauge cyber risks, structure deals to mitigate these risks, and protect both parties from unforeseen post-transaction issues.

Developing an integration strategy for a target company as a strategic buyer entails understanding the target’s business operations, assets, technology infrastructure, and regulatory environment. This process involves conducting a comprehensive risk assessment across both organizations to identify control owners, review security technologies for potential consolidation, and implement architectural enhancements to strengthen security protocols. Additionally, consolidating security tools, centralizing authentication processes, and monitoring data storage and access management are crucial steps in developing a robust integration plan for a target company.